Asset Allocation 360°: Oil is losing its self-healing powers

Welcome to the second edition of Asset Allocation 360°

Although many people are glad to see the back of 2011 − a year of economic turmoil across most global markets − the mood for the year ahead remains one of cautious optimism.

Cooling emerging market growth could prompt concerns over commodity prices, although oil is unlikely to weaken significantly unless Chinese GDP disappoints. In our opening feature in this second edition of Asset Allocation 360˚, we look at the conundrum of forecasting the oil price, in a world driven by events as well as fundamental economic trends.

While it seems the threat of contagion from the European sovereign debt crisis to core countries has subdued, it has not completely disappeared, with France and Austria recently losing their top credit rating from Standard & Poor’s. There is still the possibility that any damage to the European banking system could thwart the recovery of major Western economies. We look at how much of a risk European banks still pose and explore the impact of moves by the European Central Bank in offering unlimited three-year loans.

Despite the near certainty that recession is on the cards for Europe, strategists generally believe the chances of a credit crunch in the continent are waning. As long as the region avoids a full-blown banking crisis, the US recovery could get well underway while the emerging markets can continue to advance.

Although the emerging markets may be seemingly resilient to the economic hardships of the Western world, they lagged their developed counterparts last year and fears of a hard landing in China have not entirely dissipated. Our sections on China and the emerging markets look at how valid these fears are for the quarter ahead.

We hope you find our investment strategy guide useful, and please drop us a line with your views as to how we can develop it to meet your asset allocation needs in the coming months.

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